Whether via the adoption of one, or both of the above proposals, or in some other way, there appears to be an argument for RIA guidance documents to acknowledge the potential risks to policy coherence arising from the incorporation of several partial impact assessment into the larger RIA and to indicate to regulators how these risks might best be avoided or minimised.
toward over-regulation of risk is the emergence of a “regulatory spiral”, where the increasing propensity to regulate in response to perceptions of risk reinforces a generalised perception in the community that the world is characterised by “ever growing dangers that must be kept in check, usually by more government regulation” (ibid). This concept of increasing risk- aversion becoming self-reinforcing apparently underlies in large part the strong view of BRC about the need for policy action aimed at addressing these concerns.
Having considered some underlying causes for differences between objective and subject to risks and for what it analyses as a diminishing tolerance for risk, the BRC put forward recommendations aimed at changing perceptions of risk and of the role of government in managing risk. This approach would seem to be potentially more fruitful as a means of ensuring that regulatory decision-making increasingly responds to objective risk assessments than the alternative of simply arguing for a clear separation of objective risks and subjective risk perceptions and for ignoring the latter in the policy decision- making context.
That said, this approach seems largely to conflict with the underlying presumption of the risk literature, which is that subjective risk perceptions should be regarded as essentially exogenous by the policy-maker. For example, Hokstad and Steiro (2006) argue:
Risk should neither be defined nor managed without placing it in a cultural, sociological and psychological context... This is one reason why a RAS42 approach cannot be defined as a purely quantitative/mathematical model. One needs also to consider for instance the public’s acceptance of risk.
More particularly, in the context of the current paper, the issue of changing societal risk perceptions and expectations regarding government responses to identified risk is a broad one which is probably not feasible to address fully in the context of RIA guidance documents. Perhaps the more relevant point is that it is not realistic to put forward the view that, having separated objective risks from subjective risk perceptions, the latter should simply be ignored in undertaking the analytical process.
This is perhaps an area in which the issue of integrating quantitative and qualitative elements of RIA becomes particularly important. From an economic perspective it can be suggested that subjective risks may be at least as important in policy analysis as objective risks. That is, to the extent that differences between subjective risk assessments and objective assessments are not attributable simply to lack of information, the utility gains that result from reducing risks that are subjectively highly rated are the same, regardless of whether the objective risk is high or low.
While subjective risk perceptions may be changeable over time in response to government actions, as suggested by the conclusions of the BRC report this is clearly a longer term issue while, in the RIA context, it is arguable that subjective risk perceptions should be regarded as essentially exogenous.
Risk rules (risk neutrality vs. risk aversion; the precautionary principle) Are populations risk accepting, risk neutral or risk averse?
Theoretically, it is not possible to weigh different policy responses to identified unacceptable risks without adopting assumptions as to whether the population as a whole can best be characterised as being risk accepting, risk neutral or risk averse. This is because the relative merits of different regulatory or other policy responses to the risk will differ according to this characteristic of the population.
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Despite this, only one of the eight RIA guides reviewed for this paper discusses this issue. The United States RIA guide incorporates a brief discussion (p. 40) which states that RIA authors should assume risk neutrality in their analysis, while recognising that this assumption will not be met in practice in all cases. Importantly, the US guide points out that the assumption of risk neutrality validates the use of expected value analysis as the fundamental tool for weighing different alternatives. It may also be the case that guidance on specific risk analysis may not be contained in general document but may remain embedded in specific sectoral agencies in charge of managing specific risks, without necessarily being publicly available.
To the extent that one departs from this assumption, there would appear to be a need to specify the characteristics of the risk adverse nature being postulated for the relevant population, in order to be able to reach a definitive analytical conclusion using other approaches. This clearly involves major, perhaps insurmountable, difficulties. Based on the restricted sample above, an assumption of risk neutrality may represent the “second best”
option, in that it is the only analytically feasible approach to adopt.
The precautionary principle OECD (2006) argued that:
… The increasingly widespread promulgation of the precautionary principle in the regulatory context necessarily introduces this concept [of whether populations are risk neutral or risk averse] in the substantive sense. That is, the precautionary principle amounts to the integration of varying, but unspecified, degrees of risk aversion into the policy decision-making process.
Three of the eight RIA guides reviewed discuss the precautionary principle and, in all cases, counsel that it should be used in the RIA context. However there is some lack of clarity as to how it should be taken into account. The Australian RIA guide notes that the principle was specifically endorsed by Federal, State and Territory governments in the context of an inter-governmental agreement on ecologically sustainable development, implying that its use may be restricted to this context. No specific guidance is given as to how the principle is to be incorporated in RIA.
The EU guide states that the precautionary principle “must therefore be viewed within the overall framework of risk analysis, with the possible extreme scenarios identified by undertaking routine sensitivity analysis” (p. 48). The guide includes a brief (half page) discussion on the use of the principle in RIA.
The UK guide states that “you may need to apply the precautionary principle” and that
“The UK, along with other developed countries, is committed to using this principle.” The UK RIA guide is unique in that it provides a link to a paper providing a detailed discussion of the use of the precautionary principle (UK Government, 2002). A notable element of this paper is that it specifically counsels that action in pursuit of the precautionary principle should be consistent with principles of good regulation; specifically that it should be
“proportionate, consistent, targeted, transparent and accountable.”
The UK is thus apparently unique in having published a document that specifically seeks both to provide guidance on how the precautionary principle should be used in practical policy contexts and in seeking to reconcile the principle with the principles of good regulation. To the extent that the precautionary principle is actually adopted by governments, at least in some contexts, as an element in decision-making, it would seem
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that this approach of interpreting it in light of the regulatory policy agenda is a significant step forward. The reality in many other countries may well be that the principle is a part of the policy process, but is not being examined as part of the regulatory policy and quality agenda.
The risks for regulatory quality inherent in the adoption of an ill-defined precautionary principle have been discussed by Majone (2006). Majone argues that the precautionary principle can divert efforts to control more substantial risks toward reducing risks that are poorly understood but of relatively low importance. The opportunity costs that arise, to the extent that this dynamic operates, underline the need to ensure that the interpretation of the precautionary principle in practice is consistent with regulatory quality concepts.
Conclusion
Comprehensiveness vs. comprehensibility
There is an apparent tension between issues of comprehensiveness and comprehensibility in RIA guidance. This paper has suggested at several points that RIA guidance is lacking in its coverage of particular methodological issues and that it often fails to set out the conceptual underpinnings of certain issues. These omissions are likely, in many cases, to result from efforts to ensure that RIA guidance is made accessible to generalist policy officers by avoiding both undue detail and technical complexity. Such considerations are clearly important in ensuring that RIA guidance is used by its intended audience and so able to assist in improving analytical standards.
However, there is obviously a tension, in that less sophisticated guidance is less able to support higher analytical standards in those cases where more complex analyses are needed. One potential way of resolving this tension could be to develop a relatively brief and non-technical RIA guide which is supported by a number of technical appendices, providing additional detail and sophistication in their coverage of relevant methodological issues. Alternatively, the RIA guide can be supplemented by other, stand-alone documents providing this additional detail. Several variants on this approach can be identified:
● In Australia, Canada, the United Kingdom, and the United States BCA guides are also published, which provide substantially greater methodological guidance but largely discuss BCA in more general terms, rather than specifically in the regulatory context.
● In Australia and in Victoria, the RIA guidance document is itself relatively brief, but is supported by a substantial number of appendices dealing in some detail with specific issues.
● In several countries, a range of RIA-related materials are published on the internet sites of regulatory reform authorities.
A significant problem is the lack of cross-referencing between the various guidance documents available. For example, The Australian RIA guidance document contains no reference to the Department of Finance and Administration’s BCA guidance document.
Similarly, while the UK RIA guide provides a small number of references to the Treasury Green Book, it makes no mention of the detailed guide to the use of Multi-Criteria Analysis published by the former Department of Transport and Local Government. More remarkably, the Irish RIA guide actually contradicts the guidelines on appraising public sector capital expenditure proposals with regard to BCA decision rules, as noted above.
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These observations suggest that an important area for improvement is ensuring that the drive to make RIA guidance “user friendly” does not come at the expense of adequate levels of detail and sophistication being included in the guidance offered. This is likely to imply the use of several interlocking documents with different, but related purposes and means that efforts to ensure consistency between them and appropriate cross-referencing and cross-promotion of their availability should be seen as crucial.
A related issue in regard to the above is the need for RIA systems to incorporate the concept of proportionality in relation to required analytical standards. That is, regulatory proposals with relatively limited effects should be subject to more limited RIA requirements, with the commitment of resources to RIA being broadly proportionate to the likely extent of the regulatory impact. A number of member countries have “triage”
arrangements in place which attempt to ensure this proportionality is achieved in practice.
However, there is also a need for RIA guidance material to acknowledge this issue. This implies that, if RIA guidance is to be made more comprehensive and rigorous, it will be necessary to clarify that this, more detailed guidance is intended to apply largely to the more substantial regulatory proposals.
The perspective underlying the examination of RIA methodological guidance contained in this paper is that better quality RIA methodological practices should lead systematically to better quality regulation. The provision to regulators by regulatory reform authorities of published methodological guidance, supplemented by formal training and less formal advisory/helpdesk functions, can be expected to have a major influence on the quality of RIA achieved in practice. Thus, systematic attention needs to be paid to the quality of published RIA guidance documents and steps taken to update these documents on a regular basis in the light of policy learning, changes in RIA policy and improvements in RIA expertise and resource availability among regulators over time.
Notes
1. The German RIA guidelines document was provided in English translation (see bibliography).
However, the more detailed Handbook was not available. This latter document is understood to contain the majority of the relevant methodological material.
2.Recommendation of the OECD Council on Improving the Quality of Government Regulation. 9 March 1995.
3.Reducing Risks, Protecting People: HSE’S Decision-Making Process. Health and Safety Executive, United Kingdom, 2001, pp. 44-45.
4. In 2005, 17 member countries reported requiring in RIA a quantification of costs and benefits and the demonstration that benefits justify costs always, at least for major regulation or in selected cases.
Jacobzone, Stéphane, Chang-Won Choi, and Claire Miguet (2006), “Quality Indicators of Regulatory Management Systems”, OECD Working Papers on Public Governance, No. 4, Paris.
5. Communication with Mr Dominic Mancini, OMB, 1 November 2007.
6. QALY = Quality Adjusted Life Year. Communication with Dominic Mancini, OMB (1 November 2007).
7. Translation supplied by Mr Aarne Røvik, Ministry of Finance, 12 October 2007.
8. Department of Transport, Local Government and Regions Multi-Criteria Analysis Manual, (undated). See: www.communities.gov.uk/pub/252/MulticriteriaanalysismanualPDF1380Kb_
id1142252.pdf Note that, in Australia, BTRE (1999) also includes a chapter discussing MCA in some detail.
9. Personal communications with author (various).
10. All Victorian RIA published since 2004 can be viewed in full text form at www.vcec.vic.gov.au.
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links to reference material on other valuation techniques.
12. Issues of proportionality might suggest that it is inappropriate to employ such indirect valuation methodologies in some cases. In others, it may be possible for a judgement to be reached that none of the available methodologies is likely to be appropriate to the particular case.
13. Since 2005, the New Zealand Treasury has published its own BCA guide.
14. This rate is applicable to public investments generally, rather than being specific to RIA.
15. Established in the Danish Manual of Socio-Economic Analysis cited in OECD (2004), p. 20.
16. See United States Government (2003), p. 33, United States Government (1992), p. 8.
17. Ministry of Finance (2005) “Behandling av kalkulasjonsrente, risiko, kalkulasjonspriser og skattekostnad i samfunnsøkonomiske analyser”, stipulation of social discount rate, risk, calculation prices and cost of tax funding in socio-economic analyses (only in Norwegian).
18. Arguably, regulatory costs incurred by businesses constitute pre-tax expenses. The effective cost to equity holders of these expenses is thus the expense less the tax that would have been levied on the additional profit that would have been earned in the absence of the regulatory expense. This implies that, where a cost of capital approach is taken, a post-tax rate of return should be used. On the other hand, the US BCA guideline specifically states that the recommended 7% discount rate represents the pre-tax opportunity cost of (incremental) capital.
19. Risk here refers only to general market risk, with the discussion elsewhere specifically rejecting the notion of adopting an allowance for non-market risk in the discount rate (see below).
20. It also notes the practical difficulty of distinguishing between market and non-market risks.
21. It should be noted that the French guide also refers to the analysis of Weitzman and that of Gollier.
However, these analyses are not discussed in detail and do not underpin the rationale for the use of a declining discount rate presented in the main part of the guide.
22. While the same author is cited, different articles are cited by the two sources. The US RIA guide cites Weitzman ML, Just Keep Discounting, But…, in Portney and Weyant (1999). The UK Green Book cites: Weitzman in Gamma Discounting, American Economic Review, Vol 91, No. 1, March 2001. Also cited is Gollier, C. (2002), Time Horizon and the Discount Rate, IDEI, University of Toulouse, mimeo.
23. This publication was based on commissioned papers, discussed at a workshop sponsored by Resources for the Future, Stanford University’s Energy Modelling Forum, the US EPA and Department of Energy and the Electric Power Research Institute.
24. The authors also note problems with the use of time-dependent discount rate functions:
Using a discount rate that depends on the period over which the analysis is being conducted is not without problems. For one thing, it leads to time-inconsistent decisions: plans that people will not follow if given the opportunity to reconsider their actions. This property of hyperbolic discounting functions makes many people uneasy about their use in benefit-cost analysis. (p. 10)
25. Hahn reviews a sample of 108 regulations passed in the US and shows that substituting values of between 1% and 9% for the discount rate varies the proportion of regulations in the sample demonstrating net benefits by only 1-3% (depending on the VSL figure used). This reflects the very wide range in regulatory effectiveness found in the sample (See esp. Hahn 2005, p. 22).
26. Ministry of Finance Handbook on Socio-economic Analysis. The NOK 15 million figure is derived primarily from the EU Environment Directorate.
27. See, for example, BTRE (2002).
28. Personal communication with Rod Bogaards, head of BCA section, OBPR, 12 June 2007.
29. Given the general observation that human capital based VSL figures tend to be significantly lower than revealed preference based figures, as a result of the conceptual differences between them.
30. Translation supplied by Aarne Rovik, Ministry of Finance, Norway, 12 October 2007.
31. Note that the use of a rule of NPV>0 has also been criticised on the basis that it does not account for the alleged tendencies among regulators toward overestimating expected benefits and/or underestimating expected costs. However, some empirical work on this issue (see OECD, 2006) has concluded that the BCA contained in RIA documents do not exhibit any systematic bias in practice.
32. Personal communication with officials of the Victorian Competition and Efficiency Commission.
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and Robert N. Stavins, Regulation and Governance (2007) 1, pp. 154-171, www.blackwell-synergy.com/
doi/abs/10.1111/j.1748-5991.2007.00008.x.
34. The Norwegian Government has also indicated that it typically adjusts prices to account for the impact of taxation.
35. NOU (1997), p. 27 Nytte-kostnadsanalyser, report on BCA by an ad hoc expert committee (only in Norwegian) www.regjeringen.no/Rpub/NOU/19971997/027/PDFA/NOU199719970027000DDDPDFA.pdf.
36. See Ivar Gaasland (2003): “En numerisk model for analyse av norsk bioproduksjon og foredling”, a numerical model of Norwegian bio-production and processing, Report 32/03, SNF Institute for Research in Economics and Business Administration (only in Norwegian). Similarly, as noted in OECD (2006), Hazilla and Kopp presented a study of the costs of the United States’ Clean Air and Water Acts in 1990, using a dynamic computable-general-equilibrium (CGE) model developed for the study.
37. See also OECD (2006) for additional discussion of this issue.
38. Of particular note in this context is the fact that the EU RIA guidance document specifically discusses administrative burdens without mentioning the SCM model.
39. Communications from Mme Dominique de Vos, Prime Minister’s Department, 10 July 2007, 7 October 2007.
40. Norwegian Government (2005): “Instructions for Official Studies and Reports”, Ministry of Government Administration and Reform, translated into English, but only available in Norwegian online: www.regjeringen.no/upload/FAD/Vedlegg/Statsforvaltning/Utredningsveileder_rev2007.pdf.
The Norwegian checklist (Norwegian Government, 2005, p. 4) is explicitly stated to be non-exhaustive in nature, with any additional partial impacts of significance also required to be identified and assessed.
41. Comprehensive tables of potential impacts, such as those included in the EC RIA guidance document (pp. 29-32) could form appendices for reference purposes.
42. RAS = Risk Across Sectors.
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